Accounting for inventory is a central part of financial accounting for any business that produces, stocks or sells items. Ultimately, profitability depends on selling inventory for more than it costs to buy. Open inventory cost refers to the cost of a business' merchandise inventory at the beginning, or opening, of an accounting period.

Defining Open Inventory

Open inventory, also known as opening inventory, is the amount of inventory that a business has on hand at the beginning of an accounting period, such as a new fiscal year or quarter. Inventory consists of merchandise ready for sale. To a manufacturer, this means items that are completed and ready to ship out when an order is placed. For retailers, inventory is physical stock in a store or warehouse. Businesses can track inventory using physical counts, computerized records or a combination of the two for enhanced accuracy.

Inventory Accounting Cycle

Like other parts of the accounting process, inventory accounting consists of a cycle that perpetually repeats itself. Each business is free to have its own opening and ending dates for accounting periods. This means that one period's opening inventory is actually the closing inventory from the previous period. There is no gap between accounting periods, although they do represent convenient points in time to correct errors and make adjustments to inventory figures.

Costing Methods

Open inventory cost requires a business to determine a method for costing, or determining the value of, inventory at the beginning of an accounting period. There are three major options for costing open inventory. Since the cost of buying inventory changes over time, these methods change how a business accounts for the value of its open inventory. The first is the first-in, first-out method (FIFO). This method assumes that sales come from the oldest inventory items. Conversely, the last-in, first-out method (LIFO) uses the assumption that sales come from the most recent additions to inventory. The third inventory costing method makes an average of inventory cost based on historic costs over time.

Impact

Open inventory cost affects a business in a number of ways. In terms of operations, it influences pricing decisions for the coming months. For example, if a business uses the FIFO method to account for the cost of inventory that has gone up in price in recent months, it will consider its remaining inventory to have a high cost and elect to raise prices or opt for a reduced profit margin. If the same business used the LIFO method, it would determine that its remaining inventory was purchased for the earlier, lower price. To the business that holds it, inventory is an asset. This means that the open inventory cost affects financial statements, such as the balance sheet and owners' equity statement.